I had heard this AIG bonus bill described as being more or less narrowly tailored to claw back AIG’s bonuses. That in fact was why some people were saying it might amount to some sort of unconstitutional action since it focused on a narrow class of individuals. But that’s not what this is about at all. Unless I’m misunderstanding this, it applies to the entirety of the concentrated financial sector — all TARP recipients talking over $5 billion.
If you have a household income over $250,000, and you receive a bonus, 90% of that bonus would be taken back in taxes — through a mix of income and excise taxes.
This strikes me as pretty ill-advised on a couple levels.
First, what’s to stop the companies from just folding the ‘bonuses’ into straight salary income? In which case, the whole thing goes out the window?
Second, this cuts a pretty broad swathe. You don’t want CEOs who drove their companies into the ground pulling down multi-million dollar bonuses from companies that wouldn’t even exist any more without big taxpayer handouts. And the folks at AIGFP who played a big part in driving the whole economy into the ditch with their reckless and possibly criminal behavior shouldn’t big reaping big rewards of taxpayer money.
But it’s not clear to me why a couple, both of whom work in the financial services industry, and make $150,000 each should essentially have their entire bonuses taken back in taxes.
This seems like just another example of perverse outcomes from the ‘worst of both worlds’ approach we’re taking to the whole finance industry bailout — keep the same people in charge of the institutions, keep effectively insolvent institutions afloat, but throw a lot of federal dollars in their direction and put in place fairly draconian tax provisions for money that’s spent in ways we find either wasteful or offensive.
Late Update: A number of readers have written in to say they’re not shedding any tears for a couple making a combined income of $250,000 who face a huge tax hit on the income they make over that amount. But I’m not either. It’s not a fairness issue in my mind. I think it’s too broad a brush, probably too destabilizing to a financial sector we’re already trying to stabilize. Of course, I was figuring we should have ushered a lot of these companies through some sort of managed restructuring or bankruptcy, in which case a lot of this would simply be moot. But as long as we’re doing it this way, as I said, this just seems like the worst of both worlds.
Late Accountancy Update: One reader points out that there are big tax benefits to the companies to paying compensation in the form of bonuses as opposed to ordinary salary income, which is no doubt the reason why, for many in the finance industry, the bonuses totally dwarf the base salaries.
Even Later Accountancy Update: Tax attorney TPM Reader JN adds the following: “This is only correct with respect to the CEO and the other 4 most highly paid officers of a company (there is a limitation on deductibility of compensation over $1,000,000 paid to these people except for certain incentive-based compensation – the TARP bill has additional limitations that aren’t relevant here). For ordinary employees of a company there is no tax difference to the company between paying straight salary and a bonus (although I imagine there could very well be accounting benefits of which I am not aware).”